How will VAT impact UAE consumers and businesses?

As expected, one can see a surge in the number of people discussing the impending value-added tax (VAT) system in the GCC region.

In the UAE, seemingly everyone, nationals and expatriates alike, have been airing their concerns as the country approaches the implementation date of the tax, which would directly affect consumers.

A survey released by CFA Society Emirates, an association for financial and investment professionals, on Monday (June 6) revealed that 82 per cent of the respondents said that when the UAE introduces VAT at a rate of five per cent at the start of 2018, will lead to higher inflation rates.

The survey, in which CFA members and charter-holders were polled, notes that demand for luxury goods will be affected the most by additional VAT costs, followed by cars, tobacco and real estate. Meanwhile, respondents saw healthcare as the sector that will be least impacted by the additional tax costs.

Interestingly, another survey released on the same day showed that nearly half of the GCC firms have a “minimal understanding” on how VAT will affect their businesses.

Leading accounting and consultancy firm Deloitte’s latest survey, Global CFO Signals – Still Reluctant to Spend, showed that 81 per cent of chief financial officers (CFOs) are yet to incorporate VAT considerations into their strategic planning processes.

Although inflation rates are also heavily influenced by interest rates and economic growth, the immediate effects (of VAT) will pose challenges to both consumers and businesses. The additional costs will only be marginally felt by the day to day consumer, but it will have a bigger effect on higher budget purchases, said Amer Khansaheb, CFA, President of CFA Society Emirates.

“However, the short-term impact will be offset by the long-term benefit VAT will bring to the regional economies. There is an urgent requirement to diversify government revenues, which are currently still largely dependent on income from oil and gas, and VAT is a measure that will allow more stability given that the outlook for crude prices remains volatile. Additionally, VAT would encourage more responsible consumer spending patterns and prices would have to be reduced in order for demand to match this trend; which would eventually lead to a decrease in inflation rates,” added Khansaheb.

CFA Society Emirates’ survey also revealed that 80 per cent of the respondents would consider moving abroad if an income tax were introduced. For 59 per cent of them, the GCC’s tax-free environment was a key factor in their decision to reside here.

On the corporate level, the survey revealed that employers will not consider relocating if corporate tax is introduced, according to 59 per cent of the respondents, although 41 per cent of them believe they will not go away.